In a response to Governor Brown’s May revision of California’s budget, the Legislative Analysts Office revealed that the tax incentives enacted in 2013 to replace the Enterprise Zone program have failed to live up to their promise.

“By providing a hiring tax credit and a state sales tax exception on innovative tools, the new law will allow Takeda California to pursue staffing levels and collaborations with local universities that we would not have been able to afford otherwise,” said Takeda California President and Chief Science Officer Dr. Keith Wilson.

“With the signing of today’s bills, California now has real economic development programs in place that create new jobs,” said California Labor Federation Executive Secretary-Treasurer Art Pulaski. “And not just any jobs. Good jobs, middle class jobs, jobs that build communities and rev up our engine of economic growth.”

“The Governor’s economic package signed into law today will be invaluable to enabling small and mid-size California life science companies to be more competitive in the global market,” said BIOCOM President and CEO Joe Panetta.

The new Initiative will be funded by redirecting approximately $750 million annually from the state’s outdated and ineffective Enterprise Zone program.

However, the LAO now explains:

In 2013, California acted to gradually eliminate, over time, its tax benefits for certain businesses in “enterprise zones,” a state economic development program our office had found to be expensive and ineffective.

As part of the 2013 enterprise zone elimination package, state leaders instituted new business tax benefits that were intended to be more effective ways of encouraging business investment and job creation. These new tax benefits included (1) a new exemption for certain manufacturing or research and development equipment from part of the sales tax, (2) a new credit (replacing a prior credit) to encourage hiring by certain businesses, and (3) a new incentive under which businesses would apply for a tax credit in exchange for certain hiring and investment decisions. (This latter incentive is now known as the California Competes tax credit program, which is administered by the Governor’s Office of Business and Economic Development and currently awards a certain amount of tax credits for these purposes each year.)

Estimates in analyses of the 2013 bills instituting these changes anticipated the revenue effects of these changes would be close to “revenue neutral” for the state, at least through 2016-17. These projections, derived from tax agency and administration estimates as of 2013, anticipated that the revenue losses from the new sales tax exemption, the new hiring credit, and the California Competes program would roughly offset revenue gains from the gradual elimination of enterprise zones and the prior jobs credit. Over time, we have been asked how accurate these initial estimates have proven to be.

According to the administration’s May 2017 estimates, summarized below, the tax changes from the enterprise zone elimination package have instead resulted in a net revenue gain of several hundred million dollars per year for the state’s General Fund. While estimated revenue gains from elimination of enterprise zones have remained essentially unchanged, state revenue losses from the new sales tax exemption and the new hiring credit are far below initial estimates in the bill analyses. (We discussed the sales tax exemption earlier this year.) Actual usage of credits allocated by California Competes has been slower than expected, but these seem likely to ramp up somewhat, so long as the program continues.

It’s interesting to note that Takeda California, whose president was quoted in the Governor’s press release, has not received the New Employment Credit nor the California Competes credit based on information published by the FTB and Cal-BIZ.

WASHINGTON – U.S. Senators Dick Durbin (D-IL) and Tammy Duckworth (D-IL) today introduced two pieces of legislation to expand and increase access to employment opportunities for at-risk youth. The Helping to Encourage Real Opportunity (HERO) for At-Risk Youth Act and the Creating Pathways for Youth Employment Act will increase federal resources for communities seeking to create or grow employment programs and provide tax incentives to businesses and employers to hire and retain youth from economically distressed areas. U.S. Representative Robin Kelly (D-IL-02) introduced the House companion today.

“The best anti-poverty, anti-crime, anti-violence program is a job. That is why Senator Duckworth and I are introducing two bills that will help provide our nation’s youth with increased opportunities for employment,” said Durbin. “Our underserved communities need the federal government to be an engaged partner when it comes to expanding economic opportunity; Senator Duckworth and I are working hard to achieve this goal.”

“Far too many young Americans live in poverty while struggling to find jobs or economic opportunity, often in communities across the country already struggling with dishearteningly commonplace violence and danger. It doesn’t have to be that way, but it’s not going to get better unless we work together to do something about it. That’s why I’m so proud to join Senator Durbin to introduce these bills to help open up new economic opportunities for every American, no matter where they live,” said Duckworth.

In 2015, nearly five million low-income 16 to 24 year-olds in the United States were both out of school and out of work. In Illinois, the number of unemployed and out of school youth ages 20 to 24 was nearly 17 percent in 2015, and in Chicago, the rate was nearly 22 percent. This issue affects communities nationwide – in rural areas, 20.3 percent of youth were out of school and unemployed in 2015. For youth of color, joblessness is even more chronic and concentrated: 18.9 percent of Black youth and 14.3 percent of Hispanic youth between the ages of 16-24 were out of school and out of work nationally in 2015.

These statistics reflect a long-term trend in communities nationwide that was exacerbated by the recent recession. Many of the youth living in neighborhoods with highly concentrated poverty and unemployment are stuck in a vicious cycle that finds them lacking the necessary job experiences that prevent them from getting hired by potential employers. These barriers to employment at a young age can have devastating consequences on the long-term employment prospects of at-risk youth, including lower lifetime earnings, higher rates of incarceration, and opioid addiction. These factors also make at-risk youth significantly more likely to become victims of violent crime.

The HERO for At-Risk Youth Act would encourage the business community to become a partner in addressing this crisis by hiring at-risk youth that reside in communities with high rates of poverty. Specifically, the bill would provide a tax credit of up to $2,400 for businesses that hire and train youth ages 16-24 who are out of school and out of work and youth ages 16-21 that are currently in foster care or have aged out of the system. The legislation would also expand the summer youth program under the Work Opportunity Tax Credit (WOTC), which provides a tax credit to businesses that hire for summer employment youth ages 16-17 who are enrolled in school and live in highly distressed urban communities known as Empowerment Zones, by doubling the amount of the credit to $2,400 and expanding the program to include year-round employment.

Durbin and Duckworth are also introducing the Creating Pathways for Youth Employment Act, which will make it easier for local governments and community organizations to apply directly for federal funding to create and expand summer and year-round employment programs for young people. The legislation would establish a five-year, $1.5 billion competitive grant program for youth summer employment and a five-year, $2 billion competitive grant program for youth year-round employment that will provide financial support for communities seeking to create, improve, or grow summer and year-round employment opportunities for youth ages 14-24. Fifty percent of funds would be reserved for programs serving in-school youth, and fifty percent would be reserved for programs serving out-of-school youth. Both grant programs would provide planning grants of up to $200,000 for 12 months or implementation grants of up to $5 million over 3 years.

These two pieces of legislation are endorsed by: Heartland Alliance; Alternative Schools Network; National Youth Advocate Program, Inc.; Chicago Urban League; Chicago Area Project; Center for Social Innovation; and Fathers Who Care. The HERO for At-Risk Youth Act is also endorsed by the National Employment Opportunity Network.

About a year ago, we reviewed the status of the business incentive programs that California enacted as replacements for the Enterprise Zone program:

When California did away with its enterprise zone tax incentive program in 2013, it replaced that program with three new tax incentives: (1) the California Competes tax credit, (2) a partial sales tax exemption on manufacturing and R&D related equipment, and (3) the New Employment hiring tax credit (NEC). At the time, a press release from Governor Brown noted: “The new Initiative will be funded by redirecting approximately $750 million annually from the state’s outdated and ineffective Enterprise Zone program.” In order to obtain the necessary bi-partisan support, the legislation needed to be revenue neutral and shift the economic incentives from the enterprise zone program to the new programs.

Regarding the NEC in particular, we noted:

For the NEC, the legislation required that FTB publish the names of taxpayers who claimed the NEC and the amounts claimed. The FTB recently published the first list which pertains to the 2014 tax year. So far, 37 taxpayers have claimed a total of $299,164 in NEC tax credits.

$200 million for California Competes, plus about $200 million for the sales tax exemption comes to about $400 million. That leaves about $350 million before reaching the revenue neutral $750 million mark which convinced legislators to eliminate the enterprise zones. So far, the NEC is providing less than one tenth of one percent of that benefit to California businesses.

On March 27, 2017 the FTB updated their webpage publicizing the NEC credits claimed by various companies for tax years 2014 and 2015.

The total amount of credit utilized for tax year 2014 was revised upward from $299,000 to $340,822. The amount utilized in tax year 2015 was double that: $693,323.

Nevertheless, a program that was sold the the legislature as providing several hundred million in business incentives a year is still significantly under-performing that promise.

In his fiscal year 2018 budget proposal, Mass. Governor Charlie Baker is proposing a state credit to small employers who hire WOTC qualified veterans. The credit would be up to $4,000 over two years, but would only be available to businesses with fewer than 100 employees.

SECTION 35. Chapter 63 of the General Laws is hereby amended by inserting after section 38FF the following new section:-
Section 38GG. Veterans Tax Credit.
(a) A business corporation with not more than 100 employees that qualifies for and claims the Work Opportunity Credit, so called, allowed under the provisions of section 51 of the Federal Internal Revenue Code, as amended and in effect for the taxable year, for the hiring of 1 or more qualified veterans in Massachusetts, shall be allowed a credit against its excise due under this chapter in an amount equal to $2,000 for each qualified veteran hired by the business corporation. For purposes of this section, the term “qualified veteran” shall have the same meaning as under section 51(d)(3) of such Code.

(b) To be eligible for a credit under this section, (1) the primary place of employment of the qualified veteran must be in the commonwealth, and (2) on or before the day an individual begins work, a business corporation must have obtained the applicable certification from the department of career services or any successor agency that the individual is a qualified veteran.

(c) In the case of a business corporation that is subject to a minimum excise under any provision of this chapter, the amount of the credit allowed by this section shall not reduce the excise to an amount less than such minimum excise.

(d) A business corporation that is eligible for and claims the credit allowed under this section in a taxable year with respect to a qualified veteran shall be eligible for a second credit of $2,000 in the subsequent taxable year with respect to such qualified veteran, subject to certification of continued employment during the subsequent taxable year in the manner required by the commissioner. Any credit allowed under this section shall not be transferable or refundable. Any amount of the credit allowed by this section that exceeds the tax due for a taxable year may be carried forward to any of the 3 subsequent taxable years.

There is a problem in that subsection (b)(2) requires that the business obtain the relevant WOTC certificate “on or before the day an individual begins work,” which doesn’t happen under the WOTC program. Hopefully they’ll clean up this language.

The research credit is an important feature in the tax code to encourage research and experimentation by the private sector.

The IRS continues to see significant misuse of the research credit. Improper claims for this credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses.

To qualify for the credit, a taxpayer’s research activities must, among other things, involve a process of experimentation using science that is intended to improve a product or process the taxpayer holds for sale or lease. However, there are certain activities, including research after commercial production, adaptation of an existing business product or process, foreign research and research that is funded by the customer that are specifically excluded from the credit. Qualified activities also do not include activities where there is no uncertainty about the taxpayer’s method or capability to achieve a desired result.

The IRS often sees expenses from non-qualified activities included in claims for the research credit. In addition, qualified research expenses include only in-house research expenses and contract research. Qualified research expenses do not include expenses without a proven nexus between the claimed expenses and the qualified research activity.

In a comprehensive tax reform effort, everything in the tax code will be scrutinized. That includes the Work Opportunity Tax Credit.

Senators on the Finance Committee had the opportunity to submit written questions to Treasury Secretary nominee Steven Mnuchin to ask questions beyond what was covered in his live hearing. Senator Ben Cardin (D-MD) asked the following question about WOTC:

President Trump has repeatedly indicated that he wants to address poverty and joblessness in America. He has also emphasized the need to help those who have lost their jobs because the company they were working for moved overseas as well as the desire to encourage businesses to relocate back to the U.S.

One of the programs for which the Treasury Department shares responsibility with the Department of Labor is the Work Opportunity Tax Credit (WOTC). WOTC helps over 1.3 million Americans find work in the private sector. Studies by Dr. Peter Cappelli, a Wharton School of Business Labor Economist, indicate that the program more than pays for itself in savings from entitlement programs and that employers using it change their hiring practices to hire those who are eligible.

Will you work with our office to make WOTC a permanent part of the President’s goal of reducing poverty, encouraging comppanies to bring jobs back to the United States, and helping Americans displaced by overseas competition?

Mnuchin responded:

Bringing jobs back to the United States and helping American workers displaced by factories moving overseas are cornerstones of the President’s platform, so I join you in your desire to
encourage businesses to relocate back to the U.S. If confirmed, I will work with you and all stakeholders to ensure that economic incentives are aligned to facilitate job creation and business relocation here in the U.S.

Despite the fact that the Department of Labor’s TEGL 25-15 states that employers may submit WOTC applications through September 29, 2016, the IRS (which is the agency with jurisdiction over transition relief of this kind) clarifies that the deadline is today, September 28, 2016.

Representatives McDermott (D-WA), Reichert (R-WA), Davis (D-IL), Reed (R-NY), and Doggett (D-TX) have introduced H.R. 5947, a bill “To amend the Internal Revenue Code of 1986 to include foster care transition youth as members of targeted groups for purposes of the work opportunity credit.”

The language of the bill has not been made available yet, but according to a draft of the bill, a new target group would be added called, “A qualified foster care transition youth.” This is defined as an individual under the age of 27 at the time of hire who had been in foster care after age 16. This target group would be eligible for the standard $2,400 credit.

Congressman Jim McDermott commented, “The outcomes for transition age foster youth in this country are heartbreaking: nearly half are unemployed at age 24; half will spend time in a homeless shelter; and 70% will be reliant on government assistance after emancipating from foster care. The federal government has both an economic and moral interest in improving this grim reality for foster youth. In 2008, Congress passed the Fostering Connections to Success and Increasing Adoptions Act, which recognized the challenges faced by youth transitioning out of foster care by enabling them to continue to receive support services until they turn 21. In authoring that bill my goal was not to extend dependency on the foster care system, but rather to use the additional time spent in extended foster care to help these youth become independent. While extended foster care is providing a critical lifeline for thousands of youth across the country, more needs to be done to help these youth connect with career opportunities and attain self-sufficiency.”

Congressman Tom Reed (R-NY) stated, “We care about our foster kids and want to give them every opportunity to reach their highest potential. This bill is part of that process. This proposal provides a simple adjustment that encourages businesses to hire these kids, which breaks a cycle of dependence, and often a lifetime of poverty. It’s only right that we do our part to stand with our foster kids as they mature into adulthood and enter the workforce. As a member of the Congressional Foster Care Caucus, we are proud to support this bill.”

California’s Governor’s Office of Business and Economic Development has announced the dates for three new rounds of California Competes tax credits.

The application rounds will take place:

1. July 25, 2016, through August 22, 2016 ($75 million available)
2. January 2, 2017, through January 23, 2017 ($100 million available)
3. March 6, 2017, through March, 27, 2017 ($68.3 million plus any remaining unallocated amounts from the previous application periods)

The dates for the CalCompetes Committee meetings at which credit awards are finalized will be:

On Friday, June 17, the Department of Labor issued a long-awaited TEGL providing the states critical guidance regarding the renewal and expansion of WOTC which were included in the PATH Act passed on December 18, 2015.

A previous post reviewed the timeline of events through the end of May.

The TEGL provides the following critical points:

1. The IRS had previously provided transition relief for the 28-day application requirement for employees hired back to 1/1/2015 through 5/31/2016. Given that the release of this TEGL was delayed passed that deadline, the TEGL references a new IRS Notice 2016-40 (which has yet to appear on the IRS website as of this writing) which extends this transition relief through 8/31/2016. Specifically, applications for employees in all target groups, except for the new long-term unemployment recipient category, with hire dates between 1/1/2015 and 8/31/2016 can be submitted through 9/29/2016. Applications for employees in the new long-term unemployment category with hire dates between 1/1/2016 and 8/31/2016 can also be submitted through 9/29/2016. Essentially, this extends the current transition relief for 90 days without any other changes.

2. The TEGL describes the procedure states should take in order to certify eligibility for the new long-term unemployment recipient category. DOL is directing the state agencies to arrange for access to their states’ unemployment insurance claims and wage records. They will then need to develop a process to review this data to validate that applicants were in fact unemployed for at least 27 consecutive weeks and received some unemployment compensation during that unemployment. Only where the data is unavailable to validate those requirements are the states directed to use the new Self Attestation Form, ETA form 9175.

3. Regarding applications for the long-term unemployment recipient category that have been submitted thus far in 2016 prior to this TEGL, the DOL is directing the states to attempt to determine eligibility using UI claims and wage records. Where that data is insufficient to make a determination, the TEGL directs the states to send a “needs letter” to the employer requesting that they obtain a completed self-attestation form from the employee in question. There appears to be no remediation for cases in which it would be impractical to obtain the form.

Update: IRS Notice 2016-40 is available here. The IRS clarifies that the end of transition relief is 9/28/2016, not 9/29/2016 as the DOL had stated.

Approaching the end of May 2016, where do we stand with the changes made to WOTC in the PATH Act?

The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act” Division Q of P.L. 114-113) was enacted Dec. 18, 2015. That legislation extended WOTC for five years, one year back and four years forward, through the end of 2019. It also added a new targeted group of eligible employees beginning in 2016 called long-term unemployment recipients.

On January 28, 2016 the Dept. of Labor provided “Interim Instructions” to the State Workforce Agencies informing them to expect revised forms IRS 8850 and ETA 9061. The instructions state: “States may accept applications for the New Target Group using the current forms ETA forms 9061 or 9062, yet must postpone processing those certification requests until ETA issues additional guidance.”

On March 23, 2016 the IRS published a revised form 8850 as well as Notice 2016-22. As has been the case following prior periods of program hiatus, the Notice provides transition relief from the standard 28-deadline for submitting applications. Employers who hired members of targeted groups on or after January 1, 2015 and on or before May 31, 2016 may submit applications to the state agencies by June 29, 2016. In the case of employees in the long-term unemployment recipient category, employees must be hired on or after January 1, 2016. The Notice explains that revised forms IRS 8850 and ETA 9061 are necessary to administer the new target group.

The Notice also indicated that a separate self-attestation form or affidavit would be required:

The Treasury Department and the IRS anticipate that the modified forms will include a requirement that the individual signing the form attest that he or she meets the requirements to be a qualified long-term unemployment recipient and a requirement that the individual attest to the period(s) during which the individual was unemployed and the period the individual received unemployment compensation.

It wasn’t until May 10, 2016 that the DOL submitted proposed ETA 9061 and self-attestation forms to the Office of Management and Budget (OMB), the agency that must approve government forms. DOL requested that OMB approve the forms under “emergency” procedures in just three days. Ultimately, OMB approved the forms on May 17, 2016. The new form is called ETA 9175.

In order for the State Workforce Agencies to understand how to utilize the new self-attestation form and how to make qualification determinations in the new target category, they require a Training and Employment Guidance Letter (TEGL) from DOL. Such a TEGL has yet to be provided.

On May 16, 2016 Congressmen Tom Reed (R-NY) and Bill Pascrell (D-NJ) sent a letter to Labor Secretary Thomas Perez, Treasury Secretary Jacob Lew, and IRS Commissioner John Koskinen. In the letter, they pointed out the delay in implementing the new WOTC category passed in the PATH Act and asked that additional transition relief be granted in order to enable the states and employers to make the necessary changes to utilize the new category:

Continued delay of issuance of the forms and guidance needed for WOTC has put states and employers in a difficult position to implement the new provisions. An extended transitional relief period will ensure that employers screening and hiring individuals, as well as state agencies, are fully prepared to comply with the forms and guidance, once issued. We further suggest that because it has taken so long to issue guidance and forms for the long-term unemployed, the requirement that applicant fill out the attestation should only be imposed prospectively from when the forms are publicly available. For those individuals hired in 2016 in the long-term unemployed category, IRS Form 8850 which requires them to attest that ” … you are in a period of unemployment that is at least 27 consecutive weeks and for all or part of that period you received unemployment compensation,” should be sufficient.

We recently reviewed the status of California’s business incentive programs that replaced the Enterprise Zone program in 2013. We noted that the New Employment Credit (NEC) seemed to be falling significantly short of expectations. The legislation included a requirement that the FTB report to the Legislature each year on the performance of that credit and, if it would happen to fall short of expectations to explain the reasons behind such a shortfall. The first such report, for tax year 2014, is available here.

The report notes that $3.9 million in credits were claimed on returns for the 2014 tax year. The initial estimate made at the time of the legislation was that, for the first year, $22 million would be used and then presumably increase dramatically after that. The report goes on to list the structural factors of the program that are leading to this dramatic under-performance.

However, even this $3.9 million reflected in the report is inconsistent with the published list of taxpayers and the amounts of credits they claimed (which the legislation also requires FTB to publish). That report only lists about $299,000 in credit claims.

I asked the FTB to explain the difference between the two reports. A representative from the FTB responded that the differences could be categorized in four ways:

1. That there are still some returns processing or that will be processed in the future that will be included in future updates.
2. In some cases, the NEC was claimed incorrectly on a return where the taxpayer meant to claim the enterprise zone credit.
3. Some NEC credit claims were made without the required tentative credit reservation.
4. Some NEC credit claims were disallowed for not meeting other criteria.

So apparently, while the FTB received filed returns with $3.9 million in credits claimed, only about $299,000 of those credits were claimed accurately or properly. $299,000 is just over 1% of the anticipated $22 million first-year usage of the credit.

Employers have made their opinion about the excise tax clear. There is another Affordable Care Act (ACA) provision, however, that irks them nearly as much, and that is the “play or pay” rule – the mandate to offer coverage that meets ACA requirements or pay a penalty. In a recent survey of 644 employers, Mercer asked employers what changes they would like to see made to the ACA. Repealing the excise tax was first, with 85% in favor, but repealing the employer mandate was second, favored by 70% (see Figure 1).

“It’s not because they don’t want to offer coverage. It’s because proving that they offer coverage is so much work,” said Tracy Watts, Mercer’s leader for health reform.

The deadline for reporting to the IRS about coverage in 2015 was extended from March to June, and at this point most employers have a handle on their results. Virtually none of the survey respondents believe they will be liable for the “a” assessment – meaning they all offered coverage to substantially all employees working 30 or more hours per week. And just 8% thought they might be at risk for the “b” assessment – meaning that some of their employees might qualify – and obtain – subsidized coverage on the exchange because their employer’s plan did not offer affordable contributions or meet minimum plan value requirements.

“This suggests that penalties are not going to amount to a huge source of revenue,” said Beth Umland, Mercer’s research director for health and benefits. The CBO had estimated that employer penalties would raise $9 billion in revenue in 2016.[1]

Has the employer mandate resulted in more workers gaining coverage in employer plans? About three-fourths of survey respondents say that their enrollment levels have not changed due to the ACA. While 22% have seen an increase in enrollment, most say the increase was slight (less than 5%), and 4% of respondents say enrollment has decreased (see Figure 2). The most recent CBO study reports virtually no change in the number of people obtaining health insurance from their employer since the law was passed. In 2016, 155 million people, or 57% of the population under age 65, will receive employment-based coverage. [2]

When asked about the impact of the ACA on their organization, 20% of survey respondents say they have experienced higher cost and 29% say they have made unwanted plan design changes to avoid excise tax exposure. At the same time, 84% say that the additional administrative burden has had a significant impact – and 51% describe it as “very significant.”

In addition, the requirement to offer coverage to “substantially all” employees working 30 or more hours per week will get harder to meet in 2016 when the definition of “substantially all” increases from 70% to 95%. Limited duration employees, like long-term temps and interns, could trigger an assessment. About one in four respondents say they will pull back on use of these workers, and another 16% are considering it.

“More than half of Americans already get their health insurance from their employer, and three out of four workers are satisfied with their health benefits,” said Ms. Watts. “Under play or pay, employers have had to modify their plans, track worker hours, manage eligibility and report coverage to prove they are doing something they have been doing all along.”